Why retail media ad prices are declining when inflation is up

Prices for everything seem to be skyrocketing, but for the hottest segment of the digital advertising market—retail media—the exact opposite is true. After rising throughout much of 2021, prices have not only gone negative but plummeted to double-digit declines.

So, what’s going on exactly? Let’s turn to Insider Intelligence’s Industry KPIs data to find out.

• Retail media ad rates are down 12% over the past year. Retail media cost per click (CPC) went from $1.02 in Q3 2021 to $0.90 in Q3 2022, according to the latest data from Skai. In recent quarters, average pricing dipped from a high of $1.07 in Q4 2021.
• But retail media total spend is up—by a lot. In the most recent quarter, total spend was up 45% year over year. That was accompanied by a 61% surge in retail media impressions.

Industry KPIs subscribers have access to the following Retail Media performance metrics:

• Retail Media Ad Click Growth
• Retail Media Ad CPC
• Retail Media Ad CPC Growth
• Retail Media Ad Clickthrough Rate (CTR)
• Retail Media Ad CTR Growth
• Retail Media Ad Impression Growth
• Retail Media Ad Spend Growth

Inflation is governed by the laws of supply and demand. In the consumer economy, inflation arises when too much demand is chasing too little supply. The US economy has seen both drivers occur simultaneously. When the economy was pumped with stimulus checks and Paycheck Protection Program (PPP) loans, it led to a gusher of disposable income that helped fuel historically low unemployment and rising wages, thereby spurring even more consumer demand. At the same time, global supply chain issues severely curtailed product availability across many retail categories. It’s no surprise that inflation ensued.

But the opposite is true in retail media advertising. Perhaps counterintuitively, the increase in supply has significantly outpaced the increase in demand in the retail media ad market. As more retail media networks (RMNs) emerge, expand their available ad formats and inventory, and attract more ad buyers, the number of impressions is exploding. But that impressions growth (61%) is now outpacing the growth in ad spend (45%). That drove down CPCs by 12% in the most recent quarter.

Retail media and social are experiencing similar drops in ad rates. The same directional trends apply across search and social: Spend increased by 12% for both, while impressions for each soared about 30%, causing ad rates to drop into negative territory.

Ad platforms can only ramp up ad loads so far. It’s clear that as traffic and clicks begin to taper off, leading search and social platforms are increasing ad loads to find growth. But that comes with the risk of overcommercializing their platforms and turning away users.

Retail media clearly has a longer runway on ad monetization. Retail media is better positioned to increase ad loads than search and social because many RMNs are still maturing and enabling more inventory. Walmart—the No. 2 to Amazon among RMNs—implemented a second-price auction and search algorithm changes in early June 2022 that drove down CPCs, according to Skai. Other RMNs are similarly innovating to increase the scale, relevance, and ease of use of their platforms, all of which encourage more investment from brands.

Brands can invest with confidence in retail media since ad prices are uncorrelated with inflation. In aggregate, digital ad prices do correlate with inflation because they’re a function of nominal consumer expenditure. But individual digital ad marketplaces will reflect their specific dynamics. Even as retail media ad spend surges, the ramp-up in available supply continues to outpace demand. Until that relationship flips, CPCs will stay in check—but it may be safer to invest in still-maturing platforms.